Newsletter – October 2018

The Australian share market has fallen around 10% during October, taking it’s lead from a volatile but moderately declining US stock market. There are numerous factors behind this, many of which will continue to play out over coming months, so expect further volatility and recognise the distinct possibility that the correction may have further to run.

The key factor behind the recent less confident tone in markets is rising interest rates in the US and a fear that this will lead to slower growth in the economy and corporate profitability, which has been booming.

On top of this, apparently slowing growth in China, trade tensions between the US and China, Italian budget woes, Brexit uncertainty and unexpected political developments in various countries, such as Brazil and Turkey and even Germany, have contributed to the more cautious tone. As we know, Australia also has it’s share of uncertainty so its not surprising that we are following the overseas trends.

As I have suggested for some time, a degree of caution is warranted until some of the uncertainties that have potentially serious negative consequences play out.

Should we be concerned about the US-China Trade War?

The U.S.-China trade war is ratcheting up, and it’s apparent that it is not ending anytime soon. Some analysts are of the view that the U.S. is beginning to see it more as a strategic opportunity to contain Chinese assertiveness rather than as a means to invigorate U.S. manufacturing as Trump has referred to. What the White House is demanding in negotiations, Beijing cannot concede without abandoning the state-led economic model that the Communist Party of China thinks it needs to both achieve its longer term strategic goals and to address a range of political and economic problems at home – ones that it’s been grappling with even before the trade war began. With neither side seeming to see the need or having the desire to give into the other, the trade war is likely going to get bigger in coming months. Unfortunately, this is not only bad for global growth but also for financial markets which dislike uncertainty and fear lower economic growth

The good news – we are a wealthy country!

Credit Suisse recently released its 2017 Global Wealth Report, which reveals that Australian households are the wealthiest in the world when measured by median wealth:

Household wealth in Australia grew at a fast pace between 2000 and 2012 in US dollar terms, except for a short interruption in 2008. The average annual growth rate of wealth per adult was 12%, with about half due to exchange-rate appreciation against the US dollar.

The exchange-rate effect went into reverse for three years after 2012 and, like other resource-rich countries, Australia was badly hit by sagging commodity prices. Despite that slowdown, Australia’s wealth per adult in 2018 is up to USD 411,060, the second-highest in the world after Switzerland.

In terms of median wealth (half above and half below), Australia has edged above Switzerland into first place.

The composition of household wealth in Australia is heavily skewed toward non-financial assets, which significantly reflects high property prices in the capital cities. While financial assets are just 40% of total assets, they are also high on average, in part reflecting Australia’s mandatory superannuation system, which generates strong pension wealth.

While declining housing prices and a falling AUD may have taken a bit of the sheen off this situation recently, its worth reflecting on just how successful we are. Some might say despite our politicians!

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.